Amend 1065?

[BHoffman]

I have just been informed that one member of an LLC is a "limited or other" member, so his K1 income will not subject to SE tax. Had previously been informed that all members were general/managing members.

Already efiled that 1065

Does it need to be amended?

Thanks for advice.

[ChEAr$]

I have just been informed that one member of an LLC is a "limited or other" member, so his K1 income will not subject to SE tax. Had previously been informed that all members were general/managing members.

Already efiled that 1065

Does it need to be amended?

Thanks for advice.

Yes, provided that is the case. But I would want a copy of the Articles of Partnership, aka Partnership Agreement for my files confirming this fact. And perhaps some confirmation in writing that this partner indeed was not active in the business which would give rise to se tax.

[BHoffman]

Hi Harlan and thanks for your answer and advice.

What a rotten day I've had!!! Can't get one single thing finished because of missing 1099s, missing cost basis on those (*&^ DWS FUNDS 1099B forms, missing that, missing this......boo hoo

[JoshinNC]

All Llc Members Are Limited!

Hence the name LIMITED Liability Company. The only income from an LLC that is subject to SE is guaranteed payments. I make sure my clients never take GP's and they never pay SE tax (except on h/i paid for by the LLC). Of course, assumes partnership taxation. I wouldn't voluntarily put my client's investment assets with Bernie Madoff and I'm not going to voluntarily put my client's tax dollars into the Ponzi scheme that is SS.

[spencer]

Hang in there

Hi Harlan and thanks for your answer and advice.

What a rotten day I've had!!! Can't get one single thing finished because of missing 1099s, missing cost basis on those (*&^ DWS FUNDS 1099B forms, missing that, missing this......boo hoo

That's frustrating and no fun. Keep posting, that helps

[BHoffman]

I'm wondering what I should send with the amended return? The only change is that one K1. Should I just send the first page of the 1065, the amended K1 form(s), and the explanation? Or the entire return?

Thanks for the advice.

ESpencer - I'd rather post funny youtubes or songs than gripes

[ChEAr$]

Hence the name LIMITED Liability Company. The only income from an LLC that is subject to SE is guaranteed payments. I make sure my clients never take GP's and they never pay SE tax (except on h/i paid for by the LLC). Of course, assumes partnership taxation. I wouldn't voluntarily put my client's investment assets with Bernie Madoff and I'm not going to voluntarily put my client's tax dollars into the Ponzi scheme that is SS.

I must quibble with you, Josh. LLC refers to the organization itself having limited liability
(and by extension the members). it does not describe members as limited partners.

IRS still expects SE tax on their earnings unless they are not active in the business.
This of course is a matter of facts and circumstances and not descriptive phrases.

[JoshinNC]

Quibble as you feel necessary,

I must quibble with you, Josh. LLC refers to the organization itself having limited liability
(and by extension the members). it does not describe members as limited partners.

IRS still expects SE tax on their earnings unless they are not active in the business.
This of course is a matter of facts and circumstances and not descriptive phrases.

but I believe you're wrong. GP's are the only payments to an LLC member that are subject to SE tax. As long as you inform your member clients to avoid GP's you can avoid SE tax on the distributions.

[luke]

do NOT agree

but I believe you're wrong. GP's are the only payments to an LLC member that are subject to SE tax. As long as you inform your member clients to avoid GP's you can avoid SE tax on the distributions.

Sorry Josh - I totally AGREE with Harlan - IF LLC is taxed as partnership ALL income would be subject to SE tax......

[JoshinNC]

Why?

Sorry Josh - I totally AGREE with Harlan - IF LLC is taxed as partnership ALL income would be subject to SE tax......

Show me a code reference that would lead you to this conclusion. I can show you my references that clearly indicate that I am correct.

[ChEAr$]

Show me a code reference that would lead you to this conclusion. I can show you my references that clearly indicate that I am correct.

Ah, good. Now we're getting somewhere. Please tell us, and quote the IRC (Internal Revenue Code) which addresses the taxation of Limited Liability companies.

[JoshinNC]

Here ya go:

Ah, good. Now we're getting somewhere. Please tell us, and quote the IRC (Internal Revenue Code) which addresses the taxation of Limited Liability companies.

IRC Sec. 1402(a)(13) - there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services

IRC Sec. 707(c) -
Guaranteed payments.
To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263 , for purposes of section 162(a) (relating to trade or business expenses).

Definition of General Partner from Nolo.com-
"A person who joins with at least one other to own and operate a business for profit -- and who (unlike a corporation's owners) is personally liable for all the business's debts and obligations. A general partner's actions can legally bind the entire business. "

So, let's look at an example. Jim is a partner is XYZ, LLC an MMLLC taxed as a partnership. Jim owns 50% of XYZ, LLC. Jim is not personally liable for any of the business's debts or obligations under the laws of the State of Organization for the LLC. As such, Jim is a LIMITED PARTNER. Now, Jim has contributed $500,000 to the partnership and takes a distribution of $50,000 per year, and then will take payments each year after his basis is eliminated only up to his share of the profits of the business. Should Jim's basis become $0 and the LLC become unprofitable the payments to Jim would stop. This spelled out specifically in the Operating Agreement. So, Jim is not taking guaranteed payments as defined under Sec. 707(c) because said payments are determined with regard to the income of the partnership, not without as Sec. 707(c) clearly states is a requirement for GP's. Now, since Jim has been determined to be a limited partner and because it has been determined that Jim is not taking GP's none of the payments to Jim are subject to SE tax.

I usually don't take to argue with others on this board because I have learned invaluable lessons here and don't want to seem "uppity", but I will fall on the sword for this one because I have done this research more than once and am truly convinced that my position is accurate as the Code is currently written.

If you wish to provide Code references to validate your position I would be more than happy to review them and rethink my position.

[ChEAr$]

Never fear, there's no argument going on here. Such exchange of opinions and information is what we strive for.

Your quotes from the code relate to partnerships and as such is well established.
IRS sought to deal with it's application to LLC's with proposed regulations a long time ago, but congress forbade it to go any further, so here we sit in limbo. However IRS will not impose penalties on anyone following those same still proposed regulations
Section 1.1402(a)-2.

In short they provide this "limited partner (member)" status for those who meet
this criteria:

They have personal liability for debts or claims against the partnership;
They have authority to contract on behalf of the partnership; or
They participate in the partnership’s trade or business for more than 500 hours during the partnership’s tax year.

Thus we can't just call someone a limited member and coach him on how to answer IRS questions in case of audit. Plus there is always the case of THE
managing member who must obtain "general partner/member" status and whose
earnings will be subject to se tax by default.

My own position has been to recommend taxation as a sub s and stems back to before even those proposed regulations were offered.

[JoshinNC]

Why must one of the members be a managing member?

Just because a partner is the TMP does not make him/her a general partner. There is no requirement that there be a general partner in an LLC, only in a general partnership. Right?

The first of your "requirements" that you list under the proposed regs is personal liability for the debts of the partnership. Unless the member signs a personal guarantee on the debts the members are not liable for the partnerships debts, hence the LIMITED LIABILITY of the LLC organization type.

[ChEAr$]

Just because a partner is the TMP does not make him/her a general partner. There is no requirement that there be a general partner in an LLC, only in a general partnership. Right?

The first of your "requirements" that you list under the proposed regs is personal liability for the debts of the partnership. Unless the member signs a personal guarantee on the debts the members are not liable for the partnerships debts, hence the LIMITED LIABILITY of the LLC organization type.

Now now, we are not talking about a partnership here, but an LLC, and LLC's are governed by state laws which decree there must be a mangling .. managing
member. SOMEbody has to be in charge.